There are usually two types of shares in a company namely; authorized shares and issued shares.
Authorized shares refer to the amount of share capital created in the company at its inception; it is the possible maximum number of shares that a company can issue. If for instance a company has an authorized share capital of $ 2 million, then it may issue a maximum of 2 million shares at $ 1 each or issue $ 20 million shares at 10p each.
Issued Shares refers to the share capital that has been released to shareholders, for instance in the case of 2 million authorized shares, the company may decide to issue 1.5 million shares to its shareholders and retain 0.5 million unissued shares.
Classes Of Shares Issued By A Company
All shares of the company are presumed to be equal unless the articles of the company states otherwise. However, issue of shares will be classified separately, if they have different allocations on dividends, voting rights differ and treatment at the point of company closure or winding-up.
The following are different classes of shares;
This refers to the basic contributors of company share capital with voting rights. Apart from voting directors, they are entitled to dividends as allocated by the latter and may also shares surplus income accruing from the company’s winding-up. There companies which have non-voting shares.
This refers to shares that are given first priority before ordinary shares, especially during the issuance of dividends. Preferential Shareholders may also be entitled to fixed returns on their shares irrespective of the company performance.
This refers to shares that have been rendered desolate for a period of time in order to re-structure the company’s capital. They are usually rewarded after the Preference and Ordinary shares. The rights of each class of shares are stipulated in the Articles of the Company, However in the absence of the Articles the shareholder will be accorded the rights as stated in the Companies Act.
The Articles of a company that deal with issue of shares will indicate the requirements for attaining consent for making any changes in the company. However in the absence of Articles, the Companies Act requires that 75% of nominal shareholders to be a threshold for making any changes. Resolutions to make any changes are usually addressed in official company meetings as per the regulations.
Private companies that are not listed on the stock market may provide extra requirements for entitlement to a certain class rights which may render some Acts regulating companies void.
Shares can only be issued to the market after shareholders authorize company directors to do so.
The Companies Act 2006 gives 2 provisions in regards to issuance of shares;
- Section 549
This section prohibits directors from issuing shares unless they have been authorized by the Ordinary Shareholders’ Resolution or it is within the Articles of the company. This regulation covers the agreement to issue share or creating a platform for future issuance of shares. In listed companies the directors usually get permission from shareholder during the Annual General Meetings (AGM). However this resolution is subject to limits set by institutional shareholders, which only permits a maximum of 15% of shares to be issued.
This regulation however does not apply to Private Companies with only one type of shares. Unless their company Articles prohibits them, Directors of such companies can issue shares without shareholders consent.
- Section 561
This Act requires the first priority to be given to existing shareholders proportionately to their shareholding. This Act is instrumental in cushioning shareholders from dilution, where they are allowed to buy shares that the company is selling for cash (if they can afford). However the company is not obliged to issues shares to existing shareholders if it offering shares in Exchange for a non-cash asset or shares in another company.
However both Sections 549 and 561 can be rendered desolate by a Special Shareholders Resolutions or Articles of the Company.
In the case of institutional shareholders, only 5% of the issued share capital can be issued in the absence of the shareholders consent.
Rights Issues and Bonus Issues
Rights issue is the platform that a company uses to raise additional capital, by issuing shares to the public with a higher priority for existing customers. Any issue of shares for cash is considered as a Rights issue under Section 561.
In some cases, listed companies may offer issue of shares at discounted rates as a catalyst for existing shareholders, to take-up the shares. This provides shareholders with an opportunity to buy shares and sell them profitably to a third party, if they experience financial constraints.
Companies can also use open offers where shareholders are allowed to subscribe for new shares in proportion to their existing shareholder, without any discount offers. This is usually instrumental in circumventing complexities of rights issue.
Where companies are buying shares from different companies, they can use the Vendor placing platform where appointed investment bankers source for buyers who will take the shares in exchange for cash.
This is also referred as Scrip Issue or Capitalization. This involves using Company’s reserve or profits that could have been used to pay dividends, in order to raise capital by buying new shares in the company. Bonus issue will involve raising capital from external sources.